IMF warns of dangers facing Tanzania economy

Benno Ndulu, Governor of the Central Bank of Tanzania (right) with his counterpart Prof Njuguna Ndung'u, from Kenya. Tanzania may have weathered the storm of the 2008 financial and economic crisis but the country will take a beating in the event of another crisis, the International Monetary Fund has warned. File By Veneranda Sumila, THE CITIZEN

Posted Friday, July 13 2012 at 14:53
Dar es Salaam.

Tanzania may have weathered the storm of the 2008 financial and economic crisis but the country will take a beating in the event of another crisis, the International Monetary Fund has warned.

This gloomy picture can be put down to the fact that the general health of the economy has been compromised by mounting public debt, high commodity prices, declining gross reserves and a high budgetary deficit triggered by power problems that rocked the economy from 2006 to 2011.

The national debt stock rose from $8.47 billion (Sh13.55 trillion) in July 2009 to $12.56 billion (Sh20.1 trillion) this May, while the annual headline inflation has risen from five per cent in May 2009 to 18.2 per cent this May.

Foreign gross reserves have only slightly increased from $2.92 billion in July 2009 to $3.7 billion last month.

But both Finance minister William Mgimwa and Central Bank Governor Benno Ndulu said Thursday that the government was aware of the challenges and was taking steps to contain the situation.

Prof Ndulu said more efforts were going into increasing agricultural and industrial production so as to boost exports which, in turn, will increase the flow of foreign currency.

​

Tanzania's current gross reserve is greater than the one recorded in 2009 but it is largely affected by huge expenditure as a result of a population rise.

"We must continue to make extra efforts to increase the inflow of foreign currency," Prof Ndulu said, "and the best way to do this is by improving agriculture and industrial production." Tanzania's budget shortfall has risen to Sh1139.1 billion this year, compared to Sh234 billion in the year 2009. The economic growth rate fell from 6.7 per cent in 2009 to 6.4 per cent in 2011 and it is expected to record 6.8 per cent in 2012.

But Prof Ndulu said the government is working at reducing the shortfall to 5.5 per cent of the Gross Domestic Product, down from the 6.9 per cent recorded last year.

Dr Mgimwa told Parliament yesterday that the government has already finalised negotiations with big foreign companies with an interest in investing in rice production in the country's main agricultural zones to boost food production. This will in turn reduce food prices and curb inflation.

"The price of cereals has been high partly due to the high cost of production and transport," Dr Mgimwa said. "But these issues are being addressed."

High inflation

High oil prices on the world market are also to blame for high inflation but plans to increase the use of natural gas in industrial and power production will reduce dependence on oil. The government plans to spend more than $1 billion to construct a gas pipeline from Mtwara to Dar es Salaam in the 2012/13 financial year.

In its fourth review of the Tanzania's economy under the Policy Support Instrument, the IMF says, though, that the government has met most of the economic targets that are under the multilateral institution's watch except for international reserves.

Mr Naoyuki Shinohara, deputy managing director of the IMF, said in the review: "The budget for 2012/13 is appropriately targeted at further reducing the deficit, which is essential for rebuilding fiscal buffers and strengthening debt sustainability. Although the growth outlook remains positive, the volatile global economy poses risks to revenue collection."

To help overcome negative effects on the economy that might arise because of lack of adequate international reserves, the IMF has approved $224.9 million as a precautionary arrangement under the Standby Credit Facility (SCF) to Tanzania.

Mr Shinohara added: "The credit facility provides a comfortable buffer against external shocks. The authorities intend to treat the SCF as precautionary and will only draw the Fund resources should external demand deteriorate or access to international financial markets become more limited."

Rectify the situation

Experts who spoke to The Citizen Thursday said the IMF's caution on the vulnerability of the economy was valid and urged the government to stop business as usual to rectify the situation.

Dr Donath Olomi of the University of Dar es Salaam Business School said the government's borrowing from banks which have high interest rates has contributed a great deal to the growth of the national debt.

"Had the government concentrated on borrowing from big banks like the African Development Bank and the World Bank, which have lower interest rates and a long term return period," Dr Olomi said, "the national debt would have not risen to what it is today."

He said, however, that Tanzania's economy may not be affected too much by shock in the global economy due to its low level of integration with international financial markets.

Prof Humphrey Moshi of the department of economics at the University of Dar es Salaam said the national debt is too high and this may threaten investor confidence in the country for fear of a tax increase. "High debt may send the wrong signals to investors as they will feel that the government may at any time raise tax rates so as to improve revenue collection," said Prof Moshi.

He urged the government to look for market opportunities in emerging economies like China, Brazil and India instead of depending largely on the European market. "What we are supposed to do is to first identify what emerging economies have to offers us," he added, "instead of exporting without knowing the exact market demands."

The government has also been advised to look for means to bring down inflation at a faster rate. According to Prof Moshi, the government must demonstrate a true desire to improve infrastructure in the country and concentrate on irrigation farming if it wants to improve the economy.

Should the government manage to control inflation and reduce the public debt, it will be able to overcome fiscal deficit and improve the gross reserve. This year, the government has set aside Sh2.7 trillion, equivalent to 21 per cent of the budget, to service the national debt.